China's top leaders will discuss GDP growth target and stimulus measures amid economic concerns.

• This week, it is reported that Chinese President Xi Jinping and other top leaders will hold their annual central economic work conference to discuss economic policies and growth targets for the upcoming year.
• This week, market participants will monitor policymakers' actions to guide the world's second-largest economy through persistent deflation and impending U.S. tariffs.
• It is predicted that Beijing will set its next year's GDP growth target at approximately 5%, with a possibility of a slight decrease.

Beijing is reportedly preparing for the annual central economic work conference, which is set to take place this week, with Chinese President Xi Jinping and other top leaders in attendance, as the city aims to increase growth.

The Politburo, led by president Xi, usually holds a high-profile gathering before the annual conference, which will be a closed-door meeting from Dec. 11 to 12, as reported by Bloomberg.

Goldman Sachs economists stated that during the upcoming meetings, top policymakers will evaluate economic performance and policy implementation in the current year, while also establishing priorities for the following year.

Goldman Sachs reports that the central government will reveal its growth target and budget for 2025 in order to assist local governments in establishing their own targets prior to the annual parliament session in early 2026.

It is predicted that Beijing will set its GDP growth target for next year to be "around 5" percent, which is the same as the current year, or slightly lower.

According to Larry Hu, the chief China economist at Macquarie, policymakers may either maintain the 2025 growth target at approximately 5% or reduce it to 4.5-5%. Hu stated that Chinese policymakers have never lowered the target by more than 0.5 percentage points in the past.

ING's chief economist, Lynn Song, stated that China's government has almost always met its growth targets, with only two instances where growth was significantly below the target, occurring in 1990 and 2022.

Stimulus steps

Despite being on track to meet its 2021 growth target of approximately 5%, China's economy is facing long-term issues such as a persistent housing slump, sluggish domestic spending, and rising trade tensions with the US as President Donald Trump returns to power.

Since late September, Chinese officials have intensified their stimulus measures, including interest rate cuts, relaxed property purchase rules, and liquidity support for stock markets.

Despite some success in lifting certain parts of the economy, recent data shows that stimulus measures are still insufficient to counteract ongoing deflationary pressures.

On Monday, data revealed that the country's consumer price inflation in November reached a five-month low, while the producer price index fell for the 26th consecutive month, indicating a further deepening of deflation in wholesale prices.

The slowdown in the country's consumption can be traced back to its real estate market and the close relationship between local government finances and the real estate industry.

The Chinese government recently unveiled a $1.4 trillion plan to address the debt crisis faced by its local governments.

According to Morgan Stanley economists, the authorities should increase the size of the debt swap program because local government financial vehicle debt accounts for almost half of the country's GDP.

According to Morgan Stanley, Beijing is predicted to increase its fiscal deficit by 1.4 percentage points, enabling more central government borrowing to support the economy.

In March 2023, authorities reverted to their deficit target of 3% even as the fiscal deficit widened to 3.8% in Oct. 2023 with the issuance of special bonds.

Growing headwinds

The Chinese leadership may consider implementing larger fiscal packages next year in a multiple stage fashion as it monitors and reacts to U.S. policy, according to economists from Barclays.

Trump, who will assume office in January 2025, has stated that he will impose an additional 10% tariffs on Chinese goods unless Beijing takes action to curb the trafficking of fentanyl. Additionally, he had previously threatened to impose tariffs exceeding 60% on Chinese goods during his election campaign trial.

According to Barclays economists, the latest tariff threat is likely a "strategy to encourage China to participate in negotiations." They predict that the president-elect will ultimately only impose an additional 30% in tariffs. However, this could still result in a 1% decrease in China's GDP, they added.

If the Trump tariffs negatively impact China's exports, a policy bazooka may be implemented, and Beijing will need to boost domestic demand to meet its growth target, according to Macquarie's Hu.

Hu stated that the economy cannot achieve annual growth of 4% to 5% in the next decade through exports and manufacturing sectors alone, as they have become too large to drive growth in the long run, and exports face increased risks from trade tensions.

To become the primary driver of growth, China must prioritize increasing consumption, Hu emphasized, by addressing unemployment, raising labor income, and supporting low-income groups. Hu suggested a goal of 50% of GDP for household consumption.

Investing in China

Recently, China's government bonds have experienced a surge in demand, driven by anticipation of additional interest rate reductions and weak economic indicators. As a result, the 10-year yields have fallen below the 2% threshold, reaching a record low.

The Chinese government has tried to curb the bond market surge, which was driven by concerns about its economy and a scarcity of appealing investment prospects.

Despite some encouraging signs of recovery in China's property market, "we didn't see any improvement in domestic economic data in the last few months," said Edmund Goh, investment director at abrdn.

UBS Asset Management's head of investment, Barry Gill, stated that China remains his top pick due to its low valuations and the potential to surprise investors in various aspects, surpassing other markets.

The Chinese stock market index CSI 300 decreased by 0.5% on Monday, despite rising 1.3% on Friday to its highest point in two weeks, as some traders anticipated additional stimulus at this week's policy meeting.

The UBS asset management team predicts that a more decisive stimulus response could lead to a market turnaround within the next 12-18 months.

— CNBC's Evelyn Cheng contributed to this report.